Tax Planning Guide

PA Pass-Through Entity (PTE) Tax Election: How Pennsylvania Business Owners Can Work Around the SALT Cap in 2026

A pass-through entity (PTE) tax election allows an S corporation or partnership to pay state income tax at the entity level, converting a capped individual deduction into a fully deductible business expense. Pennsylvania does not currently have an enacted PTE election, but proposed legislation and the 2026 SALT cap changes make this one of the most important planning conversations for Pennsylvania business owners this year.

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What Is a PTE Tax Election and Why It Matters for PA Business Owners

A pass-through entity (PTE) tax election is a state-level provision that allows an S corporation, partnership, or LLC taxed as a partnership to pay state income tax at the entity level rather than passing the full tax obligation through to individual owners. The key benefit: entity-level state taxes are fully deductible as a business expense on the federal return, which means they bypass the individual SALT (State and Local Tax) deduction cap that limits how much state and local tax a person can deduct on their personal return.

For high-income business owners in states with high marginal tax rates, the PTE election has become one of the most widely discussed tax planning strategies since the original $10,000 SALT cap was introduced in 2018. As of early 2026, approximately 36 states plus the District of Columbia have enacted some form of PTE tax election, according to multi-state tax practitioner compilations.¹ Pennsylvania is currently one of a small group of states with a personal income tax but no enacted PTE election, though legislation has been proposed that could change that.

Key Takeaways

1 The 2026 SALT cap is $40,400 for married filing jointly, but it phases down to as low as $10,000 for high earners.
2 A PTE election shifts state tax from the individual to the entity, making it fully deductible for federal tax purposes.
3 Pennsylvania does not currently have an enacted PTE election, but House Bill 1703 has been proposed.
4 PA business owners with multi-state operations may already benefit from PTE elections in other states where they operate.

The Federal SALT Cap

The 2026 SALT Cap: What Changed Under the One Big Beautiful Bill

The Tax Cuts and Jobs Act of 2017 introduced a $10,000 cap on the individual deduction for state and local taxes (SALT). For high-income earners in states with meaningful income taxes, this cap effectively increased their federal tax burden by limiting deductions they had previously relied on. The One Big Beautiful Bill Act (OBBBA), passed in 2025, temporarily raised the SALT cap for 2025 through 2029, but with a critical catch for high earners: a phase-down that can reduce the cap back toward the original $10,000 floor.

SALT Cap Parameter	2025 (Pre-OBBBA Baseline)	2026 (Under OBBBA)
Base SALT cap (MFJ)	$10,000	$40,400
Base SALT cap (MFS)	$5,000	$20,200
MAGI phase-down threshold (MFJ)	$500,000	$505,000
Phase-down mechanism	N/A	30% of MAGI above threshold
SALT cap floor	$10,000 (MFJ)	$10,000 (MFJ)

Source: OBBBA (P.L. 119-21) provisions; practitioner compilations from Thomson Reuters, TurboTax, and UHY-US, as of 2026. Figures may be subject to interpretation and individual circumstances.²

How the Phase-Down Works in Practice

A married couple with $600,000 in MAGI in 2026 would have their SALT cap reduced by 30% of the $95,000 above the $505,000 threshold, or $28,500. Their effective SALT cap would be approximately $11,900 instead of $40,400. For business owners with significant Pennsylvania state tax liability, this means the individual SALT deduction provides limited relief at higher income levels, which is precisely where a PTE election, if available, would offer the most value.

Pennsylvania's Status

Does Pennsylvania Have a PTE Tax Election in 2026?

No. As of July 2026, Pennsylvania does not have an enacted pass-through entity tax election. Pennsylvania remains one of a small group of states, including Delaware, Maine, North Dakota, and Vermont, that levy a personal income tax on pass-through income at the individual owner level but have not enacted an entity-level PTE tax election that would allow business owners to bypass the federal SALT cap.³

Pennsylvania's flat 3.07% personal income tax rate applies to the pro-rata share of income reported on K-1s by owners of S corporations and partnerships. The tax is paid by the individual owner, not the entity, which means it falls under the federal SALT cap on the owner's personal return. Because Pennsylvania's rate is relatively low compared to states like California or New York, the dollar impact of the SALT cap on PA business owners is smaller in absolute terms, but it can still be meaningful for owners with significant income or those who also pay substantial local or property taxes.

House Bill 1703: The Proposed PA PTE Election

Pennsylvania House Bill 1703, introduced by Rep. Keith Greiner (R-Lancaster) during the 2025-2026 legislative session, proposes creating an elective PTE tax at the entity level at Pennsylvania's 3.07% personal income tax rate. The election would be made annually by an authorized individual, generally by the 15th day of the fourth month of the taxable year, and would be irrevocable for that year. Owners would receive a refundable credit against their individual Pennsylvania tax liability for their share of the entity-level tax paid.⁴

As of July 2026, HB 1703 has been referred to the House Finance Committee but has not been brought to a final vote or enacted into law. Business owners should monitor this legislation, as its passage would create a new planning opportunity.

Why Pennsylvania Has Not Enacted a PTE Election

Several prior budget proposals and legislative efforts have considered a PTE election for Pennsylvania, but none have been adopted. The 2024-2025 budget cycle notably omitted a PTE election despite discussions. The relatively low 3.07% flat tax rate means the dollar benefit of a PTE election is smaller in Pennsylvania than in high-tax states, which may reduce legislative urgency. However, the 2026 SALT cap phase-down for high earners has renewed interest in the concept.

The Mechanism

How a PTE Election Works in States That Have One

Understanding the mechanics of a PTE election is valuable for Pennsylvania business owners for two reasons. First, if Pennsylvania enacts HB 1703 or similar legislation, you will be positioned to act quickly. Second, if you operate in multiple states, you may already be eligible to make PTE elections in those states, which could reduce your overall federal tax burden even if your Pennsylvania-source income remains subject to the SALT cap.

The Entity Makes an Annual Election

The S corporation or partnership elects to pay state income tax at the entity level. This election is typically made by a specific deadline, often the 15th day of the fourth month of the taxable year, and is generally irrevocable for that year once made. The election applies to the entity, not to individual owners, which means all owners participate by default.

The Entity Pays State Tax on Owner Income

The entity calculates and pays state income tax on each owner's pro-rata share of income sourced to that state. The tax rate is typically the state's individual income tax rate, applied at the entity level. This payment is a deductible business expense on the entity's federal tax return, which means it reduces the taxable income passed through to owners on their K-1s.

Owners Receive a State Tax Credit

Each owner receives a credit (often refundable) on their individual state tax return for their share of the entity-level tax paid. This credit offsets or eliminates their individual state tax liability on that same income, preventing double taxation. The net economic result is that the state tax is paid once, but the federal deduction occurs at the entity level where it is not subject to the SALT cap.

Important caveat: While the PTE election can reduce federal taxable income for business owners, it may have trade-offs. The entity-level tax payment reduces the income available for distribution to owners. In some states, the credit may not fully offset the owner's state tax liability in all scenarios. The election is irrevocable for the year, which means there is no flexibility to unwind it if circumstances change. Owners should model the net benefit with a tax advisor before electing.

Illustrative Scenario

How the Numbers Compare: With and Without a PTE Election

The following illustrative scenario shows how a PTE election could affect a Pennsylvania business owner's federal tax position. This is a simplified hypothetical example for educational purposes only. Actual outcomes depend on individual tax situations, entity structure, income level, filing status, and other factors. These figures do not represent any specific client's results.

Scenario Component	Without PTE Election	With PTE Election (Hypothetical)
Entity type	S corporation, PA resident owner	S corporation, PA resident owner
Pass-through income	$1,000,000	$1,000,000
PA state tax rate	3.07%	3.07%
Who pays the state tax	Individual owner	Entity
PA state tax amount	$30,700	$30,700
Federal deductibility	Subject to SALT cap ($10K floor at high MAGI)	Fully deductible at entity level
Federal taxable income reduction	Capped at $10,000 (if MAGI high enough)	$30,700 (full deduction)

Illustrative example for educational purposes only. Pennsylvania does not currently have an enacted PTE election. Actual results depend on individual circumstances and should be modeled with a qualified tax advisor.

What This Means in Dollar Terms

In the hypothetical scenario above, the difference between a $10,000 capped SALT deduction and a $30,700 entity-level deduction is $20,700 in additional deductible state taxes. At a 37% federal marginal rate, that could represent approximately $7,659 in additional federal tax savings. However, this benefit is only available in states with enacted PTE elections, and Pennsylvania is not currently one of them. The example illustrates why business owners in the 36 states with PTE elections use this strategy and why Pennsylvania business owners should be aware of the gap.

This is a simplified illustration and does not account for the owner's full tax picture, including local taxes, property taxes, federal credits, alternative minimum tax, or other factors. Net benefit varies by individual circumstances.

Multi-State Operations

Multi-State Strategy: Using PTE Elections Outside Pennsylvania

Many Pennsylvania business owners operate across state lines. If your S corporation or partnership has income sourced to states that have enacted PTE elections, such as New York, New Jersey, Maryland, Ohio, or Virginia, you may be able to make PTE elections in those states even though Pennsylvania does not offer one. This can partially offset the SALT cap limitation on your federal return.

The key consideration is nexus: whether your business has sufficient presence in a state to trigger state tax filing obligations. If you do, and that state has a PTE election, the entity can elect to pay tax at the entity level on the income sourced to that state. The federal deduction for those entity-level tax payments is not subject to the SALT cap, regardless of whether your Pennsylvania-sourced income is capped on your individual return.

This strategy requires coordination across state tax filings and an understanding of how each state's PTE credit interacts with your Pennsylvania resident tax return. Pennsylvania typically allows a credit for taxes paid to other states, which can further improve the outcome.

States Bordering PA With PTE Elections

New York: PTE election available

New Jersey: PTE election available

Maryland: PTE election available

Ohio: PTE election available

Virginia: PTE election available

Source: Multi-state PTE election compilations, as of 2026. State tax rules change frequently; verify current status with a tax advisor.⁵

Beyond the Election

Integrating the PTE Election With Broader Tax and Estate Planning

A PTE election, when available, is not a standalone strategy. It interacts with several other planning areas, and the greatest value comes from coordinating them together rather than treating each in isolation.

Investment Strategy

Federal tax savings from a PTE election may free up capital for investment. How those dollars are allocated, whether into taxable brokerage accounts, tax-advantaged retirement plans, or private market investments, affects the ongoing tax efficiency of the overall plan. Entity-level deductions also reduce the income passed through on K-1s, which can change the owner's eligibility for certain tax strategies.

Estate and Trust Planning

For owners considering trust structures or gifting strategies, the interaction between entity-level taxation and trust income can create unexpected outcomes. Non-grantor trusts that are owners of the pass-through entity may have different tax treatment than individual owners. Coordinating the PTE election with your estate and inheritance tax planning can help avoid unintended consequences.

Business Sale Preparation

If a business sale is on the horizon, the pre-sale entity structure affects how proceeds are taxed. A PTE election in the years leading up to a sale can reduce federal taxable income and potentially improve the after-tax position of the owner. However, the election is annual and irrevocable, so timing matters.

The PTE election also interacts with W-2 tax planning strategies for owners who receive both W-2 wages and K-1 income from the same business. The relative mix of wage income versus pass-through income affects how much benefit the PTE election provides, since W-2 income is not eligible for entity-level state tax deduction.

Who Should Pay Attention

Which Pennsylvania Business Owners Should Monitor This

S Corporation Owners With High Pass-Through Income

If your S corporation generates significant income and your MAGI exceeds the $505,000 SALT cap phase-down threshold, the individual SALT deduction provides minimal relief. A PTE election, if enacted in PA, could allow the entity to deduct the full state tax.

Partnership Owners Operating Across State Lines

If your business has nexus in states with enacted PTE elections, you may already have an opportunity to reduce your federal tax burden through entity-level state tax payments in those states, regardless of Pennsylvania's status.

Founders Planning a Business Exit

In the years preceding a sale, optimizing entity structure and tax positioning can affect after-tax proceeds. Understanding whether a PTE election is available, and modeling its impact, is part of pre-exit planning.

High-Income W-2 Earners With Side Business Income

If you earn substantial W-2 income alongside K-1 income from a pass-through entity, the SALT cap affects your W-2 state tax withholding differently than your business income. A PTE election could separate the business portion from the individual cap.

Important Considerations

Risks and Limitations of the PTE Election Strategy

The PTE election is not a one-size-fits-all solution. Several factors can reduce or eliminate the benefit, and business owners should understand the limitations before pursuing this strategy.

Low State Tax Rate Reduces Benefit

Pennsylvania's 3.07% flat rate is among the lowest state income tax rates in the country. The dollar benefit of a PTE election is proportionally smaller than in states with rates exceeding 5% or 9%.

Irrevocable Annual Election

Once made, the election cannot be reversed for that tax year. If your business income drops unexpectedly, you may have committed to an entity-level tax payment that provides less benefit than expected.

Owner Cash Flow Impact

The entity-level tax payment reduces the cash available for distribution to owners. Owners who rely on distributions for personal expenses or other tax obligations should model the timing impact.

Legislative Uncertainty

The SALT cap itself is scheduled to revert to $10,000 after 2029 under current OBBBA provisions. If that happens, the value of a PTE election would increase significantly for all business owners in states with income taxes. Conversely, if Congress raises or eliminates the SALT cap permanently, the PTE election strategy would lose much of its rationale. Business owners should consider how legislative changes could alter the calculus over time.

Frequently Asked Questions

PTE Tax Election FAQs for Pennsylvania Business Owners

What is a pass-through entity (PTE) tax election?

A PTE tax election is a state-level provision that allows an S corporation or partnership to pay state income tax at the entity level rather than passing the tax obligation through to individual owners. The entity-level payment is fully deductible for federal tax purposes, bypassing the individual SALT deduction cap. Approximately 36 states plus the District of Columbia have enacted some form of PTE tax election as of 2026.

Does Pennsylvania have a PTE tax election in 2026?

No. As of July 2026, Pennsylvania does not have an enacted PTE tax election. House Bill 1703, introduced during the 2025-2026 legislative session, proposes creating one, but it has not been enacted. Pennsylvania remains one of a small group of states with a personal income tax but no PTE election.

What is the 2026 SALT cap and how does the phase-down work?

Under the One Big Beautiful Bill Act, the 2026 SALT cap is $40,400 for married filing jointly. For taxpayers with MAGI above $505,000, the cap is reduced by 30% of the excess MAGI over that threshold, but it cannot fall below $10,000. For example, a taxpayer with $600,000 in MAGI would have an effective SALT cap of approximately $11,900.

Can a Pennsylvania business owner use a PTE election in another state?

Potentially, yes. If your S corporation or partnership has income sourced to a state with an enacted PTE election, such as New York, New Jersey, Maryland, Ohio, or Virginia, the entity may be able to elect entity-level taxation in that state. The federal deduction for those entity-level payments is not subject to the SALT cap. Pennsylvania typically allows a credit for taxes paid to other states, which may further improve the outcome.

Is the SALT cap going away after 2026?

Under current law, the elevated SALT cap of approximately $40,400 is scheduled through 2029. After 2029, the cap is scheduled to revert to $10,000 for married filing jointly, unless Congress acts to extend or modify the provision. This legislative uncertainty is a factor in long-term tax planning around PTE elections.

Who is eligible to make a PTE election?

Eligibility depends on state law. Generally, S corporations and partnerships (including LLCs taxed as partnerships) that have income sourced to a state with an enacted PTE election are eligible. The election is made by an authorized individual on behalf of the entity, not by individual owners. C corporations are not eligible, as they already pay tax at the entity level.

What to Do Now

Action Steps for Pennsylvania Business Owners

Even though Pennsylvania does not currently have an enacted PTE election, there are concrete steps you can take now to position your business for tax efficiency.

Identify Your Multi-State Nexus

Review where your business has employees, property, or sales that create state tax filing obligations. If any of those states have enacted PTE elections, discuss with your tax advisor whether making the election in those states could reduce your federal tax burden.

Model Your SALT Cap Position

Work with your advisor to project your 2026 MAGI and determine where you fall relative to the $505,000 phase-down threshold. If your MAGI is likely above that level, your effective SALT cap may be far below $40,400, which makes entity-level tax strategies more valuable.

Monitor Pennsylvania Legislation

Track the status of House Bill 1703 and any subsequent PTE-related legislation. If Pennsylvania enacts a PTE election, the window to make the first annual election may be limited, and advance preparation will be important.

Coordinate With Your Full Advisory Team

A PTE election interacts with investment strategy, estate planning, and business sale preparation. Coordinate with your financial advisor, CPA, and estate attorney to ensure that any entity-level tax changes are reflected across your full financial plan.

Tax Planning for Pennsylvania Business Owners Starts With the Right Conversation

The PTE election is one piece of a broader tax strategy for business owners. At Defiant Capital Group, we integrate tax planning with investment management and estate strategy for founders, business owners, and high-income earners across Pennsylvania. Our team of CFA Charterholders and CFP® Professionals brings institutional discipline and firsthand experience navigating the financial complexity of business ownership.